Investment managers expect brief market correction

With the stock market setting new records each week, the possibility of a major market correction looms ever closer, according to three Baltimore investment managers.

But any drop is expected to be temporary and the market should end the year higher or at least near current levels, they said.

Their forecasts for this year were presented yesterday at the annual outlook meeting of the Baltimore Security Analysts Society.

"Historically arguing, a correction is coming," said Robert S. Killebrew Jr., chairman of the investment committee at Alex. Brown & Sons Inc. He estimates that there is a 50-50 chance the stock market could fall by 20 percent. The Dow Jones industrial average fell 30.64 points, or less than 1 percent, to 3,223.39 yesterday.

"We need a very strong recovery to justify current [stock] prices," Mr. Killebrew said. However, he expects that, given the history of the market, it would recover to current levels af

ter any major correction.

He added that the bull market since mid-December has been fueled by investors moving from money markets and certificates of deposits, where rates are now in the 4 percent and 5 percent range, into the stock market. But to sustain those high prices, there would have to be a recovery in earnings and continued low inflation -- two conditions that might not come together, Mr. Killebrew said.

Stephen W. Boesel, the president of the growth and income funds for T. Rowe Price Associates Inc. was the most optimistic of the three, saying the high stock prices are "not inappropriate ,, for the level of interest rates or the level of inflation." He expects the market to continue to move up, but not at last year's rate. "Ten to 12 percent would be a reasonable expectation," he said after the presentation.

The market is now rising on the expectation of higher earnings and falling interest rates, Mr. Boesel said. "We are getting the best of all worlds," he said. But when the recovery starts, the Federal Reserve will not be expected to continue lowering interest rates and the anticipation of higher earnings will be dissipated by the actual figures, Mr. Boesel said.

He said a major correction is "highly probable" and he expects the market to be very volatile while buffeted by presidential campaign rhetoric and an expected economic recovery.

Robert F. Boyd, senior vice president of Mercantile-Safe Deposit and Trust Co., estimated that there is a one-in-three chance that the market will have a correction in the next year and only a 10 percent to 15 percent chance it will continue to rise. Even if the market remains flat -- which he gives a 50 percent chance -- Mr. Boyd does not expect to find many good buys because of the large increases in stock prices last year.

As a result, he plans to move more of the investments he controls into money market funds and other cash-equivalent investments.